In recent months, the United States federal courts have grappled with a spate of cases addressing the restitution of Nazi-looted art. Arguably the best-known of these cases, United States of America v. Portrait of Wally, involving a painting by Egon Schiele, was settled in July 2010 by way of an amended Stipulation and Order filed in a New York federal district court. The terms of settlement provided for the release by the Bondi Jaray Estate of its claim to the painting in favour of the Leopold Museum in Vienna.
In return, the Museum was required to pay the Bondi Jaray Estate US$19m for title to, and possession of, the painting. In addition, the Museum is required to display signage wherever the painting is exhibited setting forth the painting’s history – including its litigation, which dates from
January 1998.
The well-publicised – and justly celebrated – settlement of Portrait of Wally is one example of the recent cases which serve boldface notice that the United States government does not condone the trafficking within its borders of art looted by the Nazis. Another such case, Bakalar v Vavra1, which is ongoing, has, in its choice of law determination, effectively changed the legal landscape in the Second Circuit to favour aggrieved original owners of Nazi-looted art and such owners’ heirs.
Bakalar also involves a Schiele: an erotic picture of a headless woman brushed on paper with opaque paint, Seated Woman with Bent Left Leg (Torso) (the ‘Watercolour’). In this suit, it is alleged that Fritz Grünbaum, a satirical cabaret artist who fl ed Berlin for Austria in the hope of escaping Nazi reprisals, owned a collection of 449 artworks, including 81 works by Egon Schiele, which he kept in his apartment in Vienna. In 1938, days after the Anschluss, Grünbaum was arrested and imprisoned by the Nazis in Dachau. That same year, while in Dachau, he was made to sign a power of attorney authorising his wife Elisabeth to represent him in all his affairs, including listing and fi ling with the government a statement of his assets and property, as was required by the Reich of all Jews living within its borders.
The Nazis then used the information to impose confiscatory taxes and penalties on Grünbaum and compelled Elisabeth to dispose of Grünbaum’s assets to pay the imposed taxes and penalties.
In 1941, Grünbaum died in Dachau. In 1942, Elisabeth Grünbaum was arrested by the Nazis and died shortly thereafter in a concentration camp in Minsk.
In 1956, the Watercolour was purchased along with 45 other works by Schiele from Grünbaum’s collection by Galerie Gutekunst, an art gallery in Switzerland. The seller of these works was apparently Elisabeth Grünbaum’s sister. In September of 1956, the Watercolour was bought
by the Galerie St. Etienne and was shipped to it in New York. In November of 1963, the Galerie St. Etienne sold it for US$4,300 to David Bakalar, a good-faith buyer and resident of Massachusetts.
In the ensuing years, the market for Schiele has become stronger than ever and Bakalar subsequently consigned the Watercolour for sale at auction through Sotheby’s London, where, in February 2005, the Watercolour sold for approximately US$726,000, including the buyer’s premium.
Sotheby’s later rescinded the sale after receiving a letter challenging Bakalar’s title to the Watercolour, written on behalf of Milos Vavra (a resident of the Czech Republic) and Leon Fischer (a New York resident), designated by an Austrian court as the heirs to the Fritz Grünbaum estate. Bakalar subsequently brought suit in a New York federal district court seeking a declaratory judgment that he is the legal owner of the Watercolour.
In 2008, the New York federal district court upheld Bakalar’s claim and, in doing so, applied Swiss law. The court proceeded to hold that, because Elisabeth Grünbaum’s sister possessed the Watercolour and other Schiele works she sold in 1956, the Galerie Gutekunst, as buyer, was entitled to presume she owned them. Because the Galerie Gutekunst was a good-faith purchaser and because the Grünbaum heirs had not produced any concrete evidence that the Nazis looted the Watercolour or that it was otherwise taken from Grünbaum, Bakalar acquired good title when he purchased the Watercolour from the Galerie St. Etienne. Moreover, the court noted that even if the Watercolour had been stolen at some point prior to the Galerie Gutekunst’s purchase in 1956, under Swiss law, any absolute claims to the Watercolour by those from whom the Watercolour was stolen expired five years later, in 1961.
On appeal by Vavra and Fischer, the Second Circuit applied New York’s choice of law rules and examined the question of whether there is a difference between the laws and policies of Switzerland and New York which could determine the outcome of the case.

Swiss law and practice
Under Swiss law (as well as, at times, under United States law, through the Uniform Commercial Code), a buyer who acquires and takes possession of an object in good faith becomes the owner, even if the seller was not entitled or authorised to transfer ownership. However, in Switzerland, one relevant exception to this rule is that if the object has been lost or stolen, the owner who previously lost the object retains the right to reclaim the object for five years.2 This means that a buyer acting in good faith will acquire valid title to stolen property after a period of five years.
Moreover, Swiss law presumes that a buyer acts in good faith, and a plaintiff seeking to reclaim stolen property has the burden of establishing that a purchaser did not act in good faith. Furthermore, the Second Circuit cited Bakalar’s expert, who noted that there has never been a legal
presumption that artworks with a potential relationship to Germany during World War II would be tainted per se and that a dealer accepting such artworks would automatically be subject to a heightened standard of diligence – either in the 1950’s or today.

New York law
In New York, unlike Switzerland, a thief cannot pass good title. This means that under New York law, in the absence of other considerations, a work of art stolen during World War II still belongs to the aggrieved original owner – even if there have been intervening good-faith buyers.3
The governing New York case in this area is Solomon R. Guggenheim Found. v. Lubell, 77 N.Y.2d 311 (1991), which addresses the issue of when a cause of action to recover stolen art accrues, therefore triggering New York’s three-year statute of limitations. Decided with the objective of preventing New York State from becoming a haven for stolen art, Guggenheim holds that the statute of limitations against a good-faith purchaser begins to run only when the aggrieved original owner makes a demand for the return of the property and the person in possession
of the property refuses to return it. Until such demand is made and refused, possession of the stolen property by the good-faith purchaser is not considered wrongful and the statute of limitations does not begin to run.
Whilst the New York courts acknowledge that the demand refusal rule is not the only method of calculating accrual of a cause of action to recover stolen property, they are of the opinion that the demand-refusal rule affords the most protection to the aggrieved original owner. In addition to supporting the demand-refusal rule, Guggenheim holds that the good-faith possessor has the burden of proving that the property in its possession is not stolen. While the New York courts recognise this to be an onerous burden for the good-faith possessor, they note that such a burden enforces the principle that buyers exercise acts of ownership over property at their peril.

Choice of law
Given the vastly different approaches of Swiss and New York law in addressing the treatment of stolen art, the choice of applicable law in this instance was crucial. The New York federal district court, in applying New York’s choice of law rules, upheld David Bakalar’s claim of ownership of the Watercolour. In doing so, the court held that Swiss law governed in this instance. In making the determination that Swiss law governed, the court applied the traditional situs rule: that is, the law of the jurisdiction where the property is located at the time of the alleged
transfer should govern. The alleged transfer was the goodfaith purchase by the Galerie Gutekunst in Switzerland from the sister of Elisabeth Grünbaum.
On appeal, the Second Circuit reversed this decision and held that the current choice of law rule in New York regarding personal property requires an interest analysis, where the law of the jurisdiction having the greatest interest in the litigation applies. Here, as the Second Circuit noted, if the claim of Vavra and Fischer is to be credited, a stolen Watercolour was delivered in New York to a New York gallery, which sold it in New York to Bakalar. In applying New York law, the Second Circuit ordered the case back to the federal district court to determine whether Vavra and Fischer have an arguable claim to the Schiele drawing, and whether Bakalar can avail himself of a defence that asserts that the heirs unreasonably delayed in asserting their rights to the Watercolour, and that their delay worked to the prejudice of Bakalar. In addition, Bakalar now has the burden of proving good title to the Watercolour – a burden which requires provenance research to make that determination. Stay tuned.

Footnotes

1) Bakalar v. Vavra, Docket No. 08-5119-cv (2d Cir. 9/02/10
2) The Swiss Act on the International Transfer of Cultural Property
(CPTA) extended the statute of limitations for the return of
stolen or lost cultural objects of a certain importance from
five to 30 years. However, the Act does not apply to events
occurring prior to its enactment in June 2005.
3) See Michelle I. Turner, Note, The Innocent Buyer of Art
Looted During World War II, 32 Vand. J. Transnat’l L. 1511,
1534 (1999).